Archives for October 2012

2.27.13: 2013 Innovation & Insight Day, featuring Celent's Eighth Annual Model Insurer Awards

Celent senior analysts, Insurance Group This event is free for Celent clients and the media. Non-clients can attend for a fee of USD $495. Space is limited, so pre-registration is required. Please click here for more information.

Why Billing Matters

I have a homeowners policy with the DoNotDisclose Insurance Company. DoNotDisclose is a large, primarily personal lines company.

 

My policy term ends on Oct 8 every year.  This past August, I received the dec page and invoice for the new year, and paid it in full online.  I mean, I thought I paid it in full. Today I discovered that whatever I did, did not result in a payment being made.

 

I’ve been away from home for a few days. Opening my mail today (October 21) I had a letter from DoNotDisclose telling me that my homeowners policy expired on October 8 due to non-payment of premium.  The letter was post-marked October 16.  Between my initial invoice in August and my Expiration Notice, I had received the following communications from DoNotDisclose: zilch, nada, and rien,

 

Looking at the letter telling me my largest single investment had been uninsured for the past two weeks literally made me queasy.

 

Does anyone know a good personal lines company that understands the relationship among billing technology, billing processes, communication, and customer experience?

EU wins Nobel Prize but it's a tough time for European insurers

A lot has been said and written about the political and economic situation in Europe. Interesting news came from Oslo last week with the Nobel Committee awarding the Peace Nobel Prize to the European Union. While I reckon that some may be right to believe that the 70-year period of peaceful time we have been experiencing in Europe since the end of World War II could have been the fruit of the European Union construction, I have my doubts that what has been true in the past decades can be verified in the future. Being Swiss and therefore not part of the European Union, I think it would be worth providing my thoughts on the topic and what it means for insurers who are about to invest in Europe today and in the near future.

Obviously there is a “BEFORE” and an “AFTER” the financial crisis and I think it is important to analyse what has changed since 2008 and the collapse of US subprime bubble, the bailout of major financial institutions including banks and insurers and the downturn in the economy experienced immediately after that.

In terms of political stability we have to admit that the situation has been pretty shaky in certain EU member countries. Actually there is a rule that applies in a majority of them: governing politicians or political parties have lost power following the financial crisis. Examples include: Spain with the defeat of the Socialist party of prime minister Zapatero, Italy with the forced resignation of Silvio Berlusconi, France with the defeat of the UMP party and president Nicolas Sarkozy, Greece with the emergence of the fragile coalition following this year’s elections. This is without saying claims from regions asking for more independence like Catalonia in Spain or Flanders in Belgium.

With regard to the economic situation, some countries parts of the Euro-zone are cause of worries. With more than 25% unemployment, Spain and Greece top this list. But what is still more worrying is not the state of their economy but its dynamic. Indeed, not only the number of unemployed people is high in these countries but the increase in unemployment is very fast. For instance the unemployment rate in Greece has been increasing at a 1% pace over the past few months. More than a debt issue, the problem faced by countries such as Spain, Greece, Portugal, Italy and to certain extend France is a lack of competitiveness and with the recession looming I fear the situation could not improve.

It is in this tough environment that insurers are planning new investments in Europe. What we have already predicted in terms of investment in new core insurance systems in the life insurance sector seems to materialize. Uncertainty seems to hit less severely the general insurance sector (property and casualty) but the industry has still to generate underwriting profits in key lines of business for instance motor insurance in France and United Kingdom. I personally think that identifying and investing in innovative business models is key to grow and generate profit in the long term in this difficult market environment and I encourage insurance companies to challenge their traditional business model.

The Future of Retail Insurance in Latin America – A brief summary of the session panel

Last Wednesday during the Retail Insurance Conference (in Spanish: “Cumbre Internacional de Seguros Masivos”) I had the pleasure of moderating a session panel about “The Future of Retail Insurance in Latin America” with the participation of Hilario Itriago, Director of IT & Operations Latin America for Royal Sun Alliance Group; Felix Chan Head of Science, Commercial Specialty for Chartis Insurance North America; Doyle Ray Oakey Director, Application Solutions – Financial Services Group for CSC and Paul Oudenhoven Vice President of Communication / CMO Latin America for Liberty Mutual Insurance.

The impressive background and experience of the panelists provided the audience with the possibility to look into the most important aspects around retail insurance. As a participant at the conference told me after, “It was great because they were able to summarize the most important things we have been listening during the entire conference!”

The panel covered the current state of retail insurance in the region, the opportunities and threats looking forward and discussed about the key elements and challenges in the path of pursuing this future.

The panelists agreed in 6 key elements and we could not perceive major disagreements, although we did see more emphasis in certain topics depending on the panelist:

1) The market is clearly a strong intermediated market and it will remain like this. In some cases it is because of regulation and a strong culture of intermediation, like Brazil. Even in the US, where Geico and Progressive are the best examples of successful direct insurance companies, the majority of the market remains to be intermediated.

2) Customers propose new ways to interact. Insurers and Intermediaries need to understand and engage accordingly. Segmentation provides a way to understand what products, at what price and using what channels.

3) They could expect consumers to go direct for the purchase of simple products at the beginning of their wealth cycle (when they have less assets and wealth to protect), but would always expect them to need of an advisor as their needs get more complicated (and they advance in their wealth cycle).

4) We have seen new players enter the market, especially in the intermediary side as it is the case of Falabella in Chile, but we can expect this trend to continue and increase. While Google’s move into the space is of their attention, they do not consider it an immediate threat in the Latin American market.

5) Technology is an enabler to pursue this market, along with new ways to imagine the best operational model. Structures and processes to deliver products in the region can be re-imagined through the use of BPO and Shared Services for example and significant budgets need to be invested in IT if you are going to enter the direct insurance market.

6) Detect, educate and retain human capital with the required knowledge and execution capabilities is one of the toughest challenges. While innovation is important they believe that whatever results of it constitutes a competitive advantage difficult to maintain. Instead, the main differentiation can only be achieved by people and discipline in execution.

It was interesting to learn that CSC fosters innovation internally by a special program for its employees to work on innovative projects with impact on their customers. The advantage of CSC is that they are able to protect innovation by means of intellectual property. ClimatEdge™ is a result of this program. It is an innovative new suite of offerings that exploits historical data from sources such as NASA and NOAA to help commodity traders, risk managers and analysts better leverage government satellite, modeling, and earth observation data to minimize risk and make better-informed financial decisions.

In summary, panelists believe that aiming for the 4.2% of insurance penetration (premiums as a % of GDP) as verified in Chile, should be the first goal in terms of growth in the retail insurance market and that a delicate balance between innovation and execution is required while at the same time protecting the business margins. Immediate threats and challenges reside in having the correct skillsets to execute. In a longer term, the outsider players – especially those we still do not know or we are just starting to perceive – and also some technological developments such as the driverless car which could alter the way insurance looks at these risks. Most of them did not perceive threats or an imminent disruption. Significant changes if perceived would take no less than 10 years.

In my opinion, while I agree that changes do not occur overnight – at least not in this industry – we should expect a more accelerated disruption triggered by technology which impacts in consumer behavior and as an enabler of new business models and offerings:

1) Mobiles/smartphones, internet and social media, all of which present higher adoption patterns in the region as compared with the rest of the world, enable new consumer behavior.

2) Outside players, specially those that are more used to serve these new type of customers, will gain importance on the intermediation side but also becoming a threat to insurers eventually.

3) On Demand, Cloud and SaaS are all enablers for smaller and new players to take advantage of technology, that was before only at the reach of bigger insurers, to serve those new segments of consumers.

Traditional players could still have an important role if they do not underestimate this wave of change.

More Q&A following our webinar on the Strategies and Options for Managing Closed Blocks: Life, Pension and Annuity Edition

Since Karen Monks and I held our webinar on the strategies and options for managing closed blocks, we have had a number of follow-up questions. We’ll aim to answer as many as possible in this blog.

If you any further questions, then please do not hesitate to contact us directly.

What regulatory /compliance problems do insurers foresee while migrating to BPOs/TPAs for closed blocks in the US?

When an insurer considers BPO / TPA as a solution, most regulators around the world express a keen desire to stay close to the decision making process. In some countries, there is also a requirement to notify the regulator as well as the policyholder. At the centre of the regulators’ concern is to ensure the fair treatment of the policyholder and, increasingly, to also ensure that their information, as well financial assets, are secure.

In the US, TPAs increasingly are required to follow many of the licensing and record keeping rules that insurers must follow, thus an insurer would do well to understand the guidelines under which TPAs must work in each state. The insurer will want to ensure that the TPA selected is compliant and protecting the security of the insurers data and information.

Another issue that insurers noted as a result of the compliance and regulatory requirements related to notifying policyholders of the use of a TPA was the potential for some sleeping policies to awaken. This may cause an uptick in claims as beneficiaries come forward.

Many insurers that we spoke with recommended engaging the regulator early in the decision process; as this was considered key to obtaining early guidance and also helping to manage their expectations throughout the process.

Do you have a sense as to the number or percentage of insurers who see their closed blocks as a ‘problem’ (i.e. that they can’t manage, are losing staff who can support the product, the costs are escalating etc)?

Not as a number or percentage. Through our interviews, it was clear that economic uncertainty, low investment returns and the availability of capital to support generous product guarantees are behind driving an increased interest in the topic. Unfortunately, only those who have gone public with a decision already or are currently in a distressed state can be identified easily as having a ‘problem’.

In our survey, it was interesting to see that many insurers see expense reduction, releasing capital and avoiding management distraction as three of the main reasons for pursuing a strategy. Additionally, nearly all insurers that we spoke to were actively investigating the issue, although some were clearly further ahead in their thinking than others. Those insurers we spoke to without a burning platform appear to be just entering their strategy definition phase.

What were the roles of the individuals interviewed for this study?

They were all senior managers within their firms (i.e. Head Of, VP, Director), with a responsibility for strategy, operations or IT.

What would an administrative reinsurance strategy be classified according to this study, Divest (sell-off)?

This proposition is a mix of liability offset (via the reinsurance arrangement) together with a BPO arrangement. Many reinsurers use existing BPO players in the market to provide the administrative service for them. Consequently, when considering options and depending upon the business drivers, it may be a good idea to evaluate how a pre-packaged proposition from a reinsurer versus a component solution compares.

Are you aware of any real success in the UK or Europe with the convert/buy-out option?

Conversions and ‘buy-out’s are tough. Ultimately, success depends on gaining agreement of every policyholder sitting in a closed block on a system to agree to the conversion / buy-out prior to being able to decommission the platform. These strategies can also attract a significant amount of regulatory oversight as they aim to ensure that policyholder interests are not being impacted unfairly.

Unfortunately, in our experience, this is not a well-documented area with many success stories that can be referenced. The largest and most notable examples tend to come from distressed insurers or funds where the policyholder is left with the choice of either accepting lower guarantees or investment performance in exchange for financial stability, or have the insurer or fund face bankruptcy.

Are companies considering BPO+ITO as an option to outsource or is it individual BPO and ITO only?

Unfortunately, there is not a ‘one size fits all’ for the market and the solution will depend to a large extent on what agreements the insurer already has in place, such as pre-existing ITO agreements, and how much outsourcing has already occurred. Consequently, insurers are still looking at both options.

From our perspective, there are a growing number of propositions being developed for BPO+ITO in the market, albeit targeted largely at satisfying a specific product type, such as Annuities, Protection, LTC or pensions. The trend is to market these propositions on an ‘as a service’ or outcome based model enabling the insurer to move onto a variable cost base quickly and achieve a degree of certainty over future costs.

Did you find any cases where a company had outsourced to a supplier and then taken it back at end of contract? Is it even feasible to take back a block if supplier and insurer decides it doesn’t work?

No. We did not research this specific issue. However, you are right to raise this as a concern. Any insurer considering a BPO option (especially where replatforming is involved) should consider carefully how they plan to exit the BPO contract should performance not meet expectations or as a result of a change in strategy. We recommend that this question be addressed early as part of an RFP and effective due diligence activity. If replatforming, it’s an essential consideration to understand the approach to migrating off the platform and, where relevant, the transfer of technical IP alongside it.

Does Celent have any example organisations in the UK and US that have successfully reduced costs of back books through technology transformation?

Yes. Please look at Celent’s report entitled ‘Seven lessons from a successful platform transformation’.

Have you seen any examples of successful technology transformations without BPO?

We are writing a Solution Spectrum report for release later this year. In preparation for this report, we have asked consultancies, BPO service providers, system integrators and software vendors to provide us with brief case studies on this topic as we recognise this is an area of interest.

Certainly, there are successful platform transformations and projects involving decommissioning or wrapping systems as we hope that these case studies will show. However, it is often difficult to look at these cases in isolation without considering the wider impact on business strategy and supporting business models.

What are the key differentiators that insurers look for in a vendor when they consider the technology transformation option?

A great question. Unfortunately, we did not ask this question in our research so cannot answer categorically.

However, the primary drivers cited for technology transformation include expense reduction and removal of the technology obsolescence risk. Consequently, based on our other research into related topics, it is reasonable to assume that insurers are likely to be focused on the ability to reduce costs quickly, the ability to reduce the risk of obsolescence, and long-term flexibility.

Is there a business case for technology vendors to invest in creating a standardized methodology for addressing closed blocks of business?

This is a ‘it depends’ answers. There is no ‘cookie cutter’ approach being marketed currently. Some vendors have acquired or are aligning their existing capabilities to address the closed block issue. The more advanced propositions have aligned common insurance frameworks and methods with their technical assets to support the process.

What platforms are you seeing being most used to host closed blocks?

From what we have seen, there is no single platform that is becoming the default for hosting closed block business. Although many BPO providers will standardise on a single platform for their operations, this platform together with all of the dependent systems differs between each competitor. However, there are a few platforms that appear to be at the heart of operations for managing closed blocks. Among others, these include: Accenture’s ALIP; CSC’s product suite of CyberLife, WMA, Integral and AIA; Infosys McCamish; TCS BaNCS; and many more home-grown or inherited solutions.

When selecting a platform for closed blocks, the reality is that BPO providers and insurers still need to take each decision about a closed block individually and evaluate the RoI for moving specific product groups versus retaining them until run-off. Until successful migrations become part of the fabric of normal IT operations, there is likely to be a number of platforms running in concert for a little longer.

You said in the webinar that this was mainly an older mature market problem today. When will we see the same issue arising in younger / emerging markets?

Our view is that it is inevitable that the same issues will be experienced elsewhere in younger and emerging markets unless those markets consider the lifespan of these products from the outset at their design stage and put in place strategies to anticipate product longevity and the run-off. The good news is that these markets have the opportunity to learn from developed markets and not to make the same mistake of focusing too heavily on new product launch without actively managing product retirement.

Also, it is important to note that software and systems integration methods have matured enormously over the last 10-20 years meaning that the technical risk of transformation and large scale data migration is much reduced, although it should be noted that the project risk around poor execution and leadership may still be present.

Successful transformations and migrations are possible and no longer a CIO’s bravest decision.

Agoraphobia and Insurance Cloud Models: Don't Be Afraid to Play Outside

The insurance industry is currently engaged in an important discussion about the potential opportunities and risks presented by modern cloud architecture. Insurers have a continuing need to reduce operational costs, increase flexibility and most importantly become better at communicating and integrating with partners and customers. Cloud computing models have the potential to help in all these dimensions and can potentially have enough impact to fuel disruptive business models. Unfortunately, there is a recent trend toward labeling private clouds as less risky than public clouds and hybrid clouds as a reasonable compromise. This is an example of cloudy thinking (sorry!) designed to maintain the current architecture and business status quo and does a disservice to innovative technology and business models. Celent believes that over the next 5+ years, insurers will naturally move to an “outside in” architectural model that that aligns well with a hybrid cloud model and, for some classes of carrier, a public only model. Private clouds adopt the services-based model which enables service reuse and enterprise process and data consistency, but only draws upon internal services. This is an incremental improvement for insurers, more efficiently organizing resources for extended private networks that often pre-date the public internet. The biggest value driver for private clouds is the ability to consolidate resources and systems across business units and geographies, which is great if you have consolidated those systems. Among insurers, HCM and financial systems fit this model well, core systems not so much. Insurers assumptions that these private networks are safer is predicated on the idea that insurers are better at network security, infrastructure management and disaster recovery than the public cloud infrastructure providers, which is unlikely. There are appropriate uses of private clouds, especially in interim IT architectures, but beware of private clouds as a key element of your longer term IT strategy. Public clouds are generally used as Software as a Service providers of a specific application or suite of applications that are somewhat configurable and maintain data security and privacy for each customer in a multi-tenant model accessible over the Internet, possibly through VPN. Like more traditional ITO outsourcing, the customer needs to do due diligence on the vendors technology choices and roadmap, infrastructure investments and security models to ensure long term vendor viability. Public cloud based SaaS applications are very useful for very specific applications that require minimal configuration, widespread access and limited integration into larger workflows. Generally, public cloud applications do not integrate well into other applications without extensive API work and work arounds. In many cases, public cloud applications were introduced to the enterprise by business units to bypass IT budget issues and work queues and are not part of the Enterprise Architecture. Note that for small companies or startups, public cloud based SaaS providers can make sense as virtual IT, IF the carrier can get past the idea that most of their business processes and concomitant IT systems are not significant business differentiators. Hybrid cloud models that are designed to integrate ‘best choice’ public services and carefully chosen internal services using a robust business process management orchestration tool to manage across an extended bus architecture are the best choice for insurers seeking innovation, cost control and risk reduction. Insurers currently use a wide variety of external services, for rating, underwriting, service fulfillment, social media, mobility and analytics. A properly implemented hybrid model that is agnostic as to where services are fulfilled, can enable insurers to reduce costs, focus on core competencies, extend distribution networks to non-traditional channels and explore new business models.